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Where a company is related to a CFC at the end of the CFC's statutory accounting period and the assessable income of the company includes a share of the attributable income of the CFC - refer to chapter 1 - the company is allowed a credit for an amount of tax equal to its attribution percentage of the CFC's notional allowable deductions for taxes paid.

A CFC can claim a notional deduction for foreign or Australian tax paid by the CFC on amounts included in the CFC's notional assessable income.

If the notional assessable income of the CFC includes a non-portfolio dividend from a related company, a notional deduction is also allowable for underlying tax the CFC is taken to have paid on the dividend.

Example 9Foreign tax credit for attributed income

An Australian resident company - Ausco - has a 60% interest in a CFC resident in an unlisted country - Forco.

Forco details:

$

Profits from a foreign branch in a listed country - not attributable income

2,000

Tax paid in the listed country on foreign branch income

600

Income derived in an unlisted country - it is all attributable income

10,000

Tax paid in the unlisted country on all income - this includes the foreign branch income

1,200

Ausco is deemed to have paid the following amount of tax on the attributed income:

Attribution percentage: 60%

Tax paid on attributed income

1,000

(10,000/1200) 12,000

Tax deemed paid by Ausco

600

(1,000/60) 100

Ausco must gross up its assessable foreign income by this amount. It can claim a foreign tax credit for $600.

Credits where benefits deemed to be dividends are attributed

If a benefit provided by a CFC is deemed to be a dividend under section 47A and is attributed to a taxpayer, a credit for foreign tax paid will be allowed only if:

the amount of the deemed dividend is included in the taxpayer's assessable income in their return lodged in the year of the distribution or

the taxpayer notifies the Tax Office, in writing, within 12 months after the end of the income year in which the benefit was provided.

Credits where income is attributed due to a change in residence of a CFC

A resident company is allowed a credit for foreign tax paid by a CFC where an amount of income is attributed to it because the CFC changed its residence from an unlisted country to a listed country or to Australia. The credit is available, however, only if the resident company is related to the CFC at the time of the change of residence - see section 160 AFCB. The company is allowed a credit for the foreign tax and the Australian tax paid by the CFC on the attributed amount.

An underlying tax credit may also be available for an attributed amount referable to a non-portfolio dividend paid to the CFC from a foreign company. A credit will be allowed only if the foreign company was related to the resident company at the time the dividend was paid. In this case, the tax deemed paid by the resident company will include an amount equal to its attribution percentage - at the residence-change time - of the underlying tax that the CFC would have been taken to have paid if the CFC were an Australian resident company.

Credits when income is attributed due to a CFC paying dividends to another CFC

Income may be attributed to a taxpayer if:

a CFC resident in an unlisted country pays a dividend to another CFC

both the CFCs are related to the taxpayer at the time the dividend was paid - see section 160AFCC.

The income attributed is referred to as the section 458 amount.

Where a section 458 amount is included in the assessable income of a company, the company is allowed a credit for foreign tax paid on the amount.

The credit can be claimed for:

the part of the foreign tax paid on the dividend that relates to the amount included in the assessable income of the resident company - this is referred to as the 'adjusted foreign tax paid'

the part of the foreign underlying tax paid on the dividend that relates to the amount included in the assessable income of the resident company - this is referred to as the 'adjusted foreign underlying tax'.

The amount of adjusted foreign tax paid by the CFC receiving the dividend does not include tax paid under the taxation law of the country in which it is resident. The amount is worked out using the formula:

AFT = section 458 amount AFT x

FTD

adjusted foreign tax paid by the CFC receiving the dividend on that part of the dividend which is not deemed to be paid out of exempting profits

FT

foreign tax paid by the CFC receiving the dividend

D

amount of the dividend

The adjusted foreign underlying tax deemed paid by the CFC receiving the dividend is worked out as follows:

AFUT = FUT x

section 458 amountD - EPP

FUT

foreign underlying tax deemed paid by the CFC receiving the dividend

D

amount of the dividend

EPP

that part of the dividend which relates to exempting profits

Example 10Adjusted foreign tax

Ausco has a wholly owned subsidiary - Forco1 - which is a resident of a listed country. Forco1 has a wholly owned subsidiary - Forco2 - which is a resident of an unlisted country. Forco2 pays a dividend of $50,000 to Forco1. There has been no previous attribution of Forco2 income - that is, there are no attribution credits - and no withholding tax has been paid on the dividend.

Forco2

$

Exempting receipts less expenses

10,000

Other net income

42,000

Tax paid

2,000

Distributable profits(10,000 + 42,000 - 2,000)

50,000

The income attributed to Forco1 under section 458 would be worked out as follows:

Section 458 amount = AP x (D - GD - EPP - T)

AP

attribution percentage:

100%

D

amount of the dividend

50,000

GD

grossed up amount of any attribution debit

nil

EPP

that part of the dividend which relates to exempting profits - that is, exempting profits divided by distributable profits multiplied by the amount of the dividend

The exempting profits are the part of the distributable profits that relates to exempting receipts.

Tax relating to the exempting receipts

384.62

10,00052,000

X 2,000

Exempting profits (10,000 - 384.62)

9,615

EPP

exempting profitsdistributable profits

X dividend amount

9,61550,000

X 50,000

9,615

T

any foreign tax deducted from the dividend by or on behalf of the CFC receiving the dividend, multiplied by the percentage of the dividend represented by (D - GD - EPP)

nil x (50,000 - nil - 9,615)50,000

nil

section 458 amount

40,385

100% x (50,000 - nil - 9,615 - nil)

The adjusted foreign tax paid by the CFC receiving the dividend is worked out as follows:

AFT =

section 458 amount x

FTD

AFT

adjusted foreign tax paid by the CFC receiving the dividend

FT

foreign tax paid by the CFC receiving the dividend

nil

Section 458 amount

40,385

D

amount of the dividend

50,000

AFT =

nil x (40,385[divided by]52,000)

nil

The adjusted foreign underlying tax deemed paid by the CFC receiving the dividend is worked out as follows:

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